Coal of Africa May Complete ArcelorMittal Sales Accord in 2011

Coal of Africa Ltd. (CZA), a South African coal producer that raised $106 million yesterday, said it’s hoping to conclude talks with steelmaker ArcelorMittal for future sales from its Makhado project around the end of 2011.

The results of test work on Makhado’s coking coal with the steelmaker are “coming through nicely,” Chief Executive Officer John Wallington said in an interview in London today. ArcelorMittal may also seek to buy from the Vele project where output is due to start in the first quarter of 2012, he said.

The world’s largest steelmaker has an option to buy between 2.5 million and 5 million metric tons of coking coal from Coal of Africa, according to a 2009 agreement. The price of metallurgical coal reached a record earlier this year as floods in Australia curbed exports.

“There’s always that risk” that Luxembourg-based ArcelorMittal (MT) may not take up the option to purchase the coal, given a weakening in demand for steel in Europe, Wallington said. Still, ArcelorMittal, owner of 15.9 percent of Coal of Africa, may use its supplies to replace more expensive coal from other producers, the CEO said.

The Makhado project may cost about $500 million to build and Coal of Africa will seek to fund its $250 million share through a combination of debt and equity, financial director Wayne Koonin said today. The company will seek to complete funding accords in the second half of next year, he said.

Exxaro Resources Ltd. has a 30 percent buy-in option for the Makhado project, which may produce 5 million tons of coking coal year.

Coal of Africa advanced 0.9 percent to 55 pence at 11:46 a.m. in London trading. It has dropped 44 percent this year and has a market value of 293 million pounds ($470 million).

To contact the reporter on this story: Jesse Riseborough in London at jriseborough@bloomberg.net

To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.